Price-Setting with Asynchronous Adjustments to Firm Prices and Outputs: Evidence using Direct Survey Measures (ESCoE DP 2023-09)

cube-no-animation-1

Price-Setting with Asynchronous Adjustments to Firm Prices and Outputs: Evidence using Direct Survey Measures (ESCoE DP 2023-09)

By

Go to next section

This paper makes two key contributions to the existing literature on the standard New Keynesian Phillips Curve (NKPC). First, it drops the restrictive and unfounded assumption in the NKPC that a constant proportion of firms adjust their price each period. By introducing asynchronous adjustments to firm prices (measured using firm-level survey responses) into the NKPC microfoundations a new asynchronous NKPC is derived, which directly incorporates the forward-looking behaviour of firms. Second, this paper proposes a new direct measure of marginal costs based on firm-level survey responses to changes in output and average costs. The key results show that the new direct measure of marginal costs performs well in both the standard and new asynchronous NKPC. In general, marginal costs are comparatively more important in explaining inflation in the asynchronous NKPC.